Catastrophic risk insurance assumes specific importance when we talk about disaster risk reduction or climate change adaptation or sustainable development since risk insurance has been advocated and effectively used in small scale to achieve these broad goals in most instances. However, the spread or uptake of risk insurance in the Asia-Pacific region and elsewhere remained negligible (compared to sales of Coke or cell phones?) due to several bottlenecks arising from policy and information imperfections. While part of the problem can be attributed to policy level imperfections, it is surprising to see that a subject that can greatly benefit corporate sector (really?) also seems to suffer same limitations that many other public policies face and the so called efficient and effective private sector seems to be oblivious to this fact that they are not able to reach out to a section of society that needs them most. The intriguing question here is, how come the same corporate sector that is extremely successful in selling a sugared drink (such as Coke or Pepsi) which in most opinion is useless and probably has least intrinsic value of whatsoever is failing to sell a very useful product such as risk insurance to the very same masses!
I am sure several people have already talked and written on this subject very extensively but I feel that there is definitely more than that meets the eye. In a quest to get even with this, I have been brainstorming (and writing) on this issue for quite some time and this is what I could come up with to summarize what may be limiting the spread of risk insurance in most cases:
"If I could convince my son to ride bicycle without fear by wearing a helmet, I am sure our marketing agents are more than intelligent and can very well communicate the risk to adult population they are targeting!!!"
I am sure several people have already talked and written on this subject very extensively but I feel that there is definitely more than that meets the eye. In a quest to get even with this, I have been brainstorming (and writing) on this issue for quite some time and this is what I could come up with to summarize what may be limiting the spread of risk insurance in most cases:
1) Affordability: The
issue of affordability could be put at the top of all the bottlenecks limiting
the spread of risk insurance in the developing Asia-Pacific. Though insurance
premiums in most of the developing Asia-Pacific region are lower than that of
those in the developed countries, the annual insurance premium costs are still
not affordable for most of the income groups in the developing countries. Part
of the high insurance premium costs emerge from the high residual risks and low
spread in terms of number of insured (i.e. poor development of the insurance
portfolio).
But, mind you, the cost of premium cannot be brought down beyond a point since the premium should meet lot of other expenses of the insurance company as well. Can we think about subsidizing the premium? Though this option appears to be most lucrative proposition for most policy makers, as they tend to go towards populistic measures, there are several others that go against this option. The argument here is sending proper price signal is important to make the insured feel the importance of [not]indulging in reckless risk taking behavior! Then the question is how do we bring down the price to an affordable level?
The price issue has two components, one is ability to pay and the second is willingness to pay. I think there is not much research on these points, if the success in uptake is achieved by targeting more on willingness to pay than on ability to pay. I would be very happy to see an approach that targets both these components of price rather than getting lost in some kind of obscurity.
2) Residual risks:
High residual risks are one of the major causes for the poor risk insurance
coverage in the region. The high residual risks are due to poor disaster risk
mitigation mechanisms, lack of or poor enforcement of laws and codes such as
building bylaws, structural codes, and laws pertaining to land use planning.
3) Presence of
insurers and reinsurers: One of the reasons behind poor penetration of
insurance and insurance prices above affordability is limited presence of
private insurers and reinsurers. Reinsurers play an important role of providing
shock absorbing capacity to the insurers. To date, very few national (e.g.
General Insurance Corporation in India, China Reinsurance Company in China,
Zenkyoren or Zenkoku Kyousai
Seikatsukyoudoukumiai Rengou Kai in Japan) and international (e.g. Munich
Re, Swiss Re, Toa Re, Axis Re) reinsurers operate in the region. Hence, there
is a very high potential for the expansion of the reinsurance sector. Insurers
and reinsurers cannot afford to operate in the region unless there is
sufficient enabling environment including efforts to reduce the residual risks.
4) High premium
costs: The high residual risks, lack of optimum number of insurers, low
competition, and low number of insured population all lead to the higher
premium costs than what they could be in the Asia-Pacific region.
5) Policy
environment: Though risk insurance is a ‘market instrument’, its dynamics
are determined or governed by the principles of an open market, government
policies and regulatory guidelines act as precursors for flourishing of the
sector and ensures the effectiveness of the instrument. Hence, the role of
government in promoting the culture of risk mitigation by promoting awareness
generation, and designing and implementing structural and non-structural
disaster risk mitigation codes and laws including institutional mechanisms and
regulations for promoting risk insurance is paramount.
Though there has already been significant improvement in
terms of policy support to insurance sector, as observed from the high growth
rates of insurance sector in the region, the support is still not comprehensive
enough. For example, currently, most developing countries in the Asia-Pacific
region are at the nascent stages of formulating national disaster risk
mitigation plans and policies and haven’t fully utilized the
potential of risk insurance in promoting risk reduction. Traditionally, strong
emphasis of most governments on disaster response over mitigation is known to
hinder the public participation in risk insurance schemes. Limited
financing is the major reason behind the poor emphasis on disaster risk
mitigation in the region.
6) Cultural and
perceptional issues: General lack of awareness and misplaced perceptions
about dealing with the risk in general and about the risk insurance in
particular among the common people and business sector also serves as a
bottleneck. Sociological research has indicated
the existence of behavioral situation that can be characterized as ‘lethal
attitude’ which suggests that things will happen whatever is done and that
things are beyond ones’ control, which limit the risk mitigation behavior of
individuals.
7) Lack of data: Infrastructure
for collecting and managing the systematic and comparable data on past risks,
vulnerabilities, disasters, and the nature of disaster losses provides
important information for designing risk insurance schemes which is either not
fully developed nor readily available and accessible to the risk insurance
industry and for the general public in most of the developing nations in the
Asia-Pacific region.
Another
important challenge, which didn’t receive much attention in the region, that
could undermine the implementation of an affective insurance facility is the liability challenge that insurers will have to deal with due to
not reporting their climate related risks to their shareholders, and probability for high insurance
payouts due to high potential for yield losses in a changing climate scenario. As a result of these limitations, most
of the initiatives couldn’t be scaled-up to cover larger, and sometimes
important geographic areas and socio-economic groups that could benefit from
insurance related instruments.
For more information, write to me and I will be happy to send a full paper that I have been working on this subject.
No comments:
Post a Comment